How to financially prepare for children



How to financially prepare for children
Photo by Alberto Casetta on Unsplash

As you think about juggling the challenges of raising a young family, or maybe you already do, putting some financial legwork down can help you find clarity in the chaos.

The first thing you should be considering when starting a family is setting up the right systems in place to ensure your family is protected should the worse happen. As money worries are often linked to mental health worries and can cause relationship strain, spending time to take control of your finances is no unworthy cause.

Think of it as a big spring clean, you need to do this to set up your living space for the year ahead and free up some much-needed headspace.

Work out the costs of raising a child and budget  

Working out the cost of having a child can be key in preparing your budget and lifestyle so you’re able to cope with the increased costs of being a parent. To help you quantify your projected spend, there are online baby calculators you can use.

Aspire Financial Advisers how to get out of debt

How to get out of debt 

When you are new parent the last thing you want is to be adding the stress of debt. As we’re in lockdown, for most of us, our expenditure has reduced meaning now’s a great time to start paying down your debt where you can. If this is not possible, look to move some of your interest-producing debt onto a 0% credit card to give you some breathing space and to make sure that debt isn’t rising. This may reduce your credit score slightly however; it should bounce back as lender’s see good money management.

If you’re struggling due to COVID-19, ask your bank for a payment holiday or even to reduce your payments to an affordable level. Note that this could mean increased costs after the holiday period.

If you feel this has become a problem, speak to a financial adviser who’ll be able to outline areas of help (usually for free), or speak to charities such as Step Change for independent debt advice.

 Check your parental benefits

One thing you need to think about is your work benefits for maternity and paternity pay alongside work flexibility if this is a need for you. This will be in the form of maternity pay and leave, or if you’re self-employed you will be eligible for Maternity Allowance. and Statutory Shared Parental Pay.

The level of which can be dependent on National Insurance contributions and your current pay so you should always check what benefits you’ll have access to.

As a new parent, remember to apply for child benefits, even if you don’t qualify for the benefits, you should register as this goes towards your national insurance contributions for your state benefit entitlement.

 Think about your family insurance 

Many people have the notion that “it will never happen to them” when it comes to ill health or early death, but unfortunately this isn’t the case for some. According to the Child Bereavement Network, by the age of 16 one out of 20 children will have experienced the death of one or both parents, not including those who will be affected by critical or long-term illness.

 This is where considered insurance planning is needed. There are three main types of insurance to think about here. Life cover provides your family a lump sum payment to help provide and replace income or lost childcare if you’re no longer there. This can be created on a joint life basis or single policy. Check what benefits you have with work, often, these policies will not be enough to cover your family’s long-term financial needs or cease when you move jobs so the additional personal cover is recommended.

 Critical illness insurance (CIC) pays out a lump sum on the diagnosis of a covered illness to help pay for any equipment you need or loss of income. In most cases, life cover and CIC will include some children’s benefits. Then income protection is designed to cover your income up to roughly 70% of your salary if you’re unable to work due to long-term illness or injury, for example, due to mental health issues or joint pain. There are two main forms, low-cost which covers you for up to two years or full-term which will pay out tax-free until you return to work or retirement.

Remember, you’ll benefit from cheaper guaranteed premiums if you take out the cover at a younger age. Also, for life cover, ensure it is written in trust so the payout will fall outside of your estate for inheritance tax purposes and means that your family will receive the payout directly and swiftly. Your insurance broker will talk you through this.

Estate planning and wills

will is a legal document whereby you can select who you would like as your beneficiaries, guardians for your children and executors of your estate. Without this document the law of intestacy comes into force, causing delays and meaning your wishes aren’t carried out as you would like, and unfortunately, many parents don’t have this in place.

You will also need to think about whether your children will have to pay for inheritance tax once you and your partner die. If you’re married, your assets will transfer tax-free to each other, however, if you are unmarried and don’t have a will in place, your estate will pass directly to your children meaning they could be left with an inheritance tax issue. The 40% tax comes into force on any assets above the nil-rate band (£325,000) plus the extra residence nil rate bank (£175,000) if you pass your main residence to a family member and your estate is valued under £2 million.

Equally, if you have children through another marriage, or are separated you need to consider making a will to ensure your children and loved ones are protected. This is when more complex estate planning is needed.

Saving for children

As your children grow, you may be considering a saving plan for their future. You could consider a Junior ISA to benefit from the £9,000 annual allowance and income-tax and capital gains tax-free growth. It’s worth noting this money can only be accessed when the child is aged 18 and can either be invested in stocks and shares or cash.

For a longer-term approach you can also save into a junior SIPP, a personal pension, up to £3,600 per year including the 20% tax relief this equates to £2,880. However, many would prioritise saving for early adult life.

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We’d love to hear your questions about the topic above, or if you would like any further information on a particular financial subject you can contact us using our contact form or via email.

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Investors do not pay any personal tax on income or gains, but ISAs do pay unrecoverable tax on income from stocks and shares received by the ISA managers.

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